Judgment:
S.H. Kapadia, J.
1. The above three references are made by the Income-tax Appellate Tribunal, Bombay, under Section 256(1) of the Income-tax Act, 1961 (hereinafter, for the sake of brevity, referred to as 'the Act'). Since they raise common questions of law and facts, they are disposed of by this common judgment
2. For the sake of convenience, we are relying upon the facts in Income-tax Reference No. 346 of 1987.
3. The basic question referred to us by the Tribunal reads as follows :
'Whether, on the facts and circumstances of the case, the assessee was entitled to deduct net interest paid by the assessee for the broken period to persons from whom the assessee bought Dated Government Securities while computing the assessee's business income ?'
4. This question is quoted from Income-tax Reference No. 173 of 1983 as it involves the principal controversy in this case. This judgment deals with the scope of Section 18 and Section 28 of the Income-tax Act, 1961.
Preface : Meaning of broken period interest.
5. The assesses-American Express International Banking Corporation is a non-resident banking company. In Income-tax Reference No. 346 of 1987, we are concerned with the assessment year 1977-78 (accounting year ending on December 31, 1976), whereas in I. T. R. No. 173 of 1983, we are concerned with the assessment year 1974-75 and in I. T. R. No. 75 of 1986, we are concerned with the assessment years 1975-76 and 1976-77.
6. Before coming to the facts of the case, a short preface needs to be mentioned. This preface explains the concept of broken period interest. Every bank is required to maintain Statutory Liquidity Ratio (hereinafter referred to as 'SLR'). For that purpose, every bank subscribes to Government securities. One such security is known as SGL (Subsidiary General Ledger). This ledger is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required, as a part of banking business, to subscribe to this loan. This loan/SGL is also transferable like any other security. In this case, for example, we are concerned with 4.75 per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs. On the SGL, the Reserve Bank of India pays half yearly interest. In the case of the said 4.75 per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs, the Reserve Bank of India was required to pay half yearly interest on May 12, 1976, and November 12, 1976. The Reserve Bank of India pays interest on due dates on such securities to the holders of the securities, every six months. The Reserve Bank of India pays interest on the balance to the banks, whose names appear as holders in the PDO ledger. After subscribing to the said loans, the banks were free to transfer such loans for consideration to the other banks. Consequently, the Reserve Bank of India pays interest to the holder on the balances in a security if, in its books, the said security stood in the name of that holder on the due date for payment of interest. As stated above, to maintain SLR levels, every bank subscribes to such loans. This is a part of banking business. However, after so subscribing, the banks are free to deal with such securities like any other trader. Therefore, there are two activities involved--one activity is that of subscribing to the loan and the other is trading. Now, if a bank purchased 4.75 per cent. GOI Loan, 1980, f. v. Rs. 5 lakhs on August 11, 1976, then, on purchase, the said bank was required to lodge the transfer form with the PDO. On such lodgement, the name of the bank was entered in the PDO ledger. Therefore, on the next due date for payment of interest, namely, November 12,1976, the bank was entitled to receive half yearly interest from the Reserve Bank of India for the period May 12, 1976, up to November 12,1976, even though it had bought the said security on August 11, 1976. Therefore, it receives interest for the entire six months, though it bought the security on August 11, 1976. In the above example, since the security was sold/transferred on August 11, 1976 (i.e., after due date for payment of interest), interest had accrued to the transferor/seller from the last due date, i.e., May 12, 1976 up to August 11, 1976.
7. Before concluding this preface, it may be pointed out that one of us (Kapadia J.) is presiding in the special court set up under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. That, in several cases before the special court, operation of SGL account is in issue and the court is familiar with operation of such accounts. In this connection, it may be mentioned that there are three types of credits which find place in SGL account in the PDO, viz., credit for subscription to new loan ; credit for purchase of SGL securities vide SGL transfer forms and, lastly, credit for lodgement of physicals. This aspect is important because it indicates the difference between investment and trading. Subscription to new loans would come under investment, whereas purchase of SGL securities by way of transfer forms would come under trading. After subscribing, the bank trades in SGL securities. This point of difference is not spelt out and seen by the Assessing Officer. It needs to be clarified that SGL account holders operate their account by using the transfer forms prescribed by the Reserve Bank of India. Lastly, it may be mentioned that the credit balances in the PDO ledger are maintained in the form of face value of the security; that a folio is allocated for each security in the PDO ledger. With this preface, we have to examine the facts of this case.
Facts :
As stated above, for the sake of convenience, the facts in Income-tax Reference No. 346 of 1987 are mentioned hereinbelow. In the said reference, we are concerned with accounting year January 1, 1976, to December 31, 1976, corresponding to the assessment year 1977-78. By order dated March 25, 1980, the Assessing Officer computed the total income at Rs. 5,01,20,289 against returned income of Rs. 4,32,55,680. The assessee had computed the figure of net profit as per the profit and loss account, making numerous adjustments. Under the impugned adjustment, payment for the broken period interest paid to the seller-bank was shown as Rs. 3,06,399. In this connection, it may be mentioned that the assessee used to deal in the Dated Government Securities. The assessee had also subscribed to the loans as and when they were floated by the Government of India/State Governments. Therefore, as stated above, the assessee used to subscribe to new loans and the assessee also used to buy and sell securities. On the subscription, interest income of Rs. 1,26,92,931 accrued. That interest income was assessed under Section 18 of the Income-tax Act (see page 28 of the paper book). In this reference, there is no challenge to the computation of interest income of Rs. 1,26,92,931 under Section 18. However, interest income accrued to the assessee as the assessee traded in securities and it is the adjustment in the computation of business income, that the dispute has arisen. As stated above, the assessee used to pay for the broken period interest whenever the assessee bought Dated Government Securities, and, similarly, the assessee used to receive payment for the broken period interest whenever they sold such securities to the counter party bank. It is the correct treatment of the receipt and payment on account of the broken period interest which is in issue in this case. During the assessment year, the impugned adjustment was made by the assessee. Under the impugned adjustment, Rs. 7,13,627 (amount paid by the assessee to the sellers for purchase of the broken period interest) less Rs. 4,07,288 (amount received by the assessee from the buyers on account of the broken period interest) amounting to Rs. 3,06,399 was claimed as deduction as revenue expenditure under Section 37. In the earlier ten (10) years, before the assessment year 1977-78, such deduction was allowed. During that period the impugned adjustment was permitted. However, in view of the judgment of the High Court in the case of CIT (Addl.) v. Vijaya Bank [1976] TLR 524 (Karn), the impugned adjustment was not permitted. Consequently, the Assessing Officer brought to charge, Rs. 4,07,288 as business income. However, the adjustment claimed by the assessee of Rs. 3,06,399 was disallowed. In other words, the Assessing Officer taxed receipt of payment of the broken period interest when the security was sold by the assessee, but he disallowed the deduction for payment made by the assessee for the broken period interest when the assessee bought the securities. This was done by the Assessing Officer as he was of the view that the judgment of the High Court in the case of Vijaya Bank [1976] TLR 524 (Karn) was applicable. The Assessing Officer took the view that outlay on purchase of income bearing assets was in the nature of capital outlay and no part of such outlay could be set off for income-tax purposes as expenditure against income accruing from the asset in question. Consequently, the Assessing Officer added back the aforestated amount of Rs. 4,07,288 being interest received by the assessee for the broken period on sale to the net profits as per the profit and loss account of the assessee, but refused deduction for interest paid for the broken period on purchase of the securities. Accordingly, the Assessing Officer computed taxable business income for the assessment year 1977-78 at Rs. 4,75,49,351 under Section 28 to which he added, inter alia, taxable interest income under Section 18 amounting to Rs. 1,26,92,931 (see page 28). Being aggrieved, the assessee-bank went in appeal to the Commissioner of Income-tax (Appeals). In that appeal, the assessee succeeded. The Commissioner of Income-tax (Appeals) came to the conclusion firstly that, in this case, the issue related to computation of the business income of the assessee-bank under Section 28. That, the assessee-bank was entitled to claim deduction for payment made by it to the seller towards the broken period interest. That, it was not open to the Department to treat receipt on account of the broken period interest as business income and deny deduction on payment made by the assessee for the broken period interest for computing the business income under Section 28. The Commissioner of Income-tax (Appeals) also came to the conclusion that the judgment in the case of Vijaya Bank [1976] TLR 524 (Karn) had no application to the facts of this case. Being aggrieved, the Department carried the matter in appeal to the Tribunal which has confirmed the order passed by the Commissioner of Income-tax (Appeals). Hence, this reference.
Arguments :
On behalf of the Revenue, Mr. R. V. Desai, learned senior counsel contended that in the present case, Dated Government Securities were bought by the assessee-bank by paying consideration for purchase of such assets. That, the assets bought were income bearing assets. That such assets were bought by the assessee, which laid out an amount as capital outlay for such purchase. That, no part of capital outlay can be set off as expenditure against income accruing from the asset in question. He relied upon the judgment of the Supreme Court in Vijaya Bank ltd. v. CIT (Addl) : [1991]187ITR541(SC) . He also relied upon the judgment of the Karnataka High Court reported in CIT (Addl.) v. Vijaya Bank [1976] TLR 524, from which the bank had gone in appeal which was disposed of by the Supreme Court as reported in : [1991]187ITR541(SC) . Mr. Desai also placed reliance on the judgment of the Supreme Court in United Commercial Bank Ltd. v. CIT : [1957]32ITR688(SC) . He contended that on purchase, the assessee paid a composite price. He contended that in this case, the basic issue was whether such composite price would be apportioned or bifurcated into interest accrued up to date of purchase and balance of the price. He contended that there is no provision under the Income-tax Act which supports such bifurcation. He further contended that interest income had accrued to the assessee by virtue of purchase and sale of Dated Government Securities. That, such interest income was assessable during the assessment year 1977-78 only under Section 18. That, since such interest income came under Section 18, it cannot fall under Section 28. He contended that once the source of income and the class of income came under Section 18, Section 28 stood ruled out. In this connection, once again, Mr. Desai has placed reliance on the aforestated judgment of the Supreme Court in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) . He cited numerous authorities in support of his contention that once a receipt is classified as income under one of the heads under Section 14, such income cannot fall simultaneously under any other head of income under Section 14, This proposition cannot be disputed. Mr. Desai contended that long standing practice followed by the assessee cannot prevent the Department from rejecting the impugned adjustments in the computation of business income if it results in loss of revenue. He contended that ultimately the touchstone of this exercise is to see that the income chargeable to tax is not understated. He contended that the Tribunal erred in not following the judgment in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) .
8. On behalf of the assessee, Mr. J. D, Mistry, learned counsel contended that the assessee's method of accounting gives a correct and accurate picture as regards interest on securities bought and sold as opposed to interest on securities received by the assessee when it subscribed to SGL floated by the Reserve Bank of India. He contended that the principle adopted by the assessee was that when one is accounting for trading in securities, interest income on such securities should be recorded as income for the period during which the bank was the holder of the security. He contended that in the present case, we are concerned with quantification of profits and gains arising from the business of the bank of trading in securities. He contended that the profit or loss resulting from the bank's business of trading in securities was assessable under Section 28 as it was a trading profit/loss. That, the judgment of the Supreme Court in the case of United Commercial Bank Ltd. : [1957]32ITR688(SC) , had no bearing on the facts of this case as in that matter, the Department had sought to assess interest income under Section 18 whereas in the present case, the Department has sought to assess the interest income resulting from the bank's business of trading under Section 28. Therefore, he contended that the said judgment of the Supreme Court has no application to the facts of this case. He contended that the method of accounting followed by the bank has been consistently followed by all banks as held by the Tribunal. He further contended that even under Section 145(1) of the Act, it was mandatory to compute income chargeable under the head 'Profits and gains of business' in accordance with the method of accounting regularly employed by the assessee and that the proviso to that section applied only when income could not be deduced therefrom. He contended that in the present matter, the proviso did not apply. He further contended that the choice of method of accounting lies with the assessee ; that the valid method regularly followed by the assessee cannot be rejected on the ground that a better method could be visualised. He further contended, by citing illustrations, that there was no difference in the amounts chargeable to tax, whether the assessee's view is adopted or the view of the Department is adopted. He further contended that the stand of the Department would lead to double taxation. He contended that when the assessee bought securities, the assessee paid the broken period interest to the sellers. That payment amounted to Rs. 7,13,627. That, similarly, when the assessee sold the securities, the assessee received payment on account of broken period interest from the buyers amounting to Rs. 4,07,288. He contended that both the above figures are for the broken period interest. However, the Assessing Officer has treated Rs. 4,07,288 as income, but has rejected the assessee's claim for deduction for payment made by the assessee towards broken period interest. In other words, receipt is treated as business income, but payment is disallowed which amounts to double taxation. Lastly, he contended that the questions raised by the Department in the present reference are erroneous inasmuch as the Department has accepted the correctness of the decision of the Tribunal on certain points and yet, opinion is sought on those very points from this court. He pointed out that even learned counsel for the Department who appeared before the Tribunal was not able to explain as to how receipt could be charged to tax, whereas claim for deduction for payment is disallowed, particularly when both the figures of Rs. 7,13,627 and Rs. 4,07,288 relate to the broken period interest (one being payment for the broken period interest and the other being receipt for broken period interest). Mr. Mistry demonstrated the method of accounting followed by the assessee over the years by giving a concrete example relating to purchase of 4% per cent. Central Loan, 1980, f. v. Rs. 5 lakhs on August 11, 1976, by the assessee (redeemable on May 12, 1980) and sold by the assessee on November 6, 1978. The due dates for interest being May 12 and November 12. We will deal with that illustration in our reasoning. Mr. Mistry further contended that the judgment of the Supreme Court in United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) has been explained by the subsequent judgment of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. : [1965]57ITR306(SC) , in which it has been laid down that United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) does not say that income from securities is not income from business. That, United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , has held that under the Income-tax Act, the head of income enumerated in the different clauses were mutually exclusive and each specific head related to items of income arising from a particular source and on that reasoning, the court held that even though the securities were part of the trading assets of the company doing business, the interest income had to be assessed under Section 8 of the Indian Income-tax Act, 1922 (corresponding to Section 18 of the Income-tax Act, 1961).
Findings :
(A) Comparison between the assessee's method of accounting and the Department's method of accounting.
9. The key issue which arises for determination in this case is the correct treatment of the broken period interest under the Income-tax Act. According to the Department's contention, the broken period interest (net) paid by the assessee at the time of purchase was a part of the capital cost of the investment and, therefore, the purchase price of the securities cannot be bifurcated into interest accrued up to the date of purchase and balance of the price. Consequently, according to the Department, payment for the broken period interest (net) cannot be claimed as revenue expenditure. On the other hand, the banks have been valuing the securities/interest held by it at the end of each year and offer for taxation, the appreciation in their value by way of profits/interest earned due to efflux of time. They also claimed deduction for the broken period interest payment. According to the assessee-bank, on purchase of Dated Government Security, i.e, for example, in 4 3/4 per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs for a lesser amount of Rs. 4,92,000, the difference of Rs. 8,000 represents profits, whereas according to the Department, as argued before the court, the difference of Rs. 8,000 represents interest on securities. Consequently, according to the Department, the said difference must be charged to tax under Section 18, whereas according to the assessee, the difference should be charged under Section 28 of the Income-tax Act. In fact, in this very case, one of the items of debate before the Assessing Officer was treasury bills. According to the assessee, the discount relating to the treasury bills was to be considered as income from 'interest on securities'. It was argued that the treasury bills are securities under the Public Debt Act and, therefore, the discount earned represented interest on securities. This argument was rejected by the Assessing Officer. It was held by the Assessing Officer that the difference between the purchase price (discount value) and the sale price (maturity value) represented business profits and not interest on securities and, therefore, the difference was included in the business income of the assessee. The point which we would like to make in this case at the very outset is whether the difference is interest on securities or business income will depend on the facts of each case. In this case, the assessee-bank maintained a method of accounting under which they have accounted for this difference as business income. As held by the Commissioner of Income-tax (Appeals) and the Tribunal, the Department has also treated this difference as business income. However, under the impugned adjustment in the method of accounting of the assessee-bank, the assessee claimed deduction for the broken period interest payment (net) at the time of purchase which was disallowed. The assessee sought deduction for the broken period interest payment (net) on the ground that it constituted revenue expenditure ; that it constituted expenditure to earn business income by way of six-monthly interest, which the Reserve Bank of India paid to holders of Government Loans. This argument was rejected by the Assessing Officer. It is argued by the Department that the broken period interest payment (net) was towards capital cost of the investment and consequently, profit on sale of a security should be taxed in the accounting year corresponding to the assessment year when the security is sold/redeemed. However, while disallowing deduction for the broken period interest payment, the Department has taxed broken period interest receipt in the hands of the assessee-bank when the security was sold. This anomaly is not answered till today by the Department. Even before the Tribunal, learned senior counsel who appeared for the Department could not explain as to on what basis broken period interest payment was disallowed while broken period interest receipt was taxed. According to the Department, the difference referred to above represented interest on securities. That such difference came under Section 18 of the Income-tax Act. This was the point which was argued orally before the court. This argument is contrary to what is on record. On record, and as held by the Tribunal, the Department has assessed the assessee, not under Section 18 as in the case of Vijaya Bank Ltd. v. CIT (Addl.) : [1991]187ITR541(SC) , but the assessee's income is brought to tax under Section 28 of the Act. Therefore, on the facts, this case does not fall in line with Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) .
10. In the present case, the Assessing Officer computed the total income of the assessee at Rs. 5,01,20,289 against revised return of Rs. 4,03,55,680. One of the disputes which arose before the Commissioner of Income-tax (Appeals) was whether the Assessing Officer was right in ignoring the impugned adjustment. Under the impugned adjustment, the assessee deducted broken period interest received, amounting to Rs. 4,07,288 from Rs. 7,13,627. Consequently, the net figure of Rs. 3,06,399 was claimed as deduction. This figure of Rs. 3,06,399 was broken period interest payment (net) paid at the time of purchase by the assessee. This was the impugned adjustment which has been ruled out by the Assessing Officer. However, at the same time, the Assessing Officer has taxed broken period interest received amounting to Rs. 4,07,288 as business income. It is this conflict which has led to the dispute. However, the bottom-line yardstick which is required to be applied to the facts of this case would be--whether the method of accounting followed by the assessee-bank does not disclose true and proper income. For that purpose as stated here-inabove, the basic point which needs to be decided is when a security which is to mature at a later date is purchased for an amount less than the amount receivable on maturity then whether the difference is to be accounted for as interest on securities under Section 18 or whether it would fall under Section 28 of the Income-tax Act. According to the Department, this difference came under Section 18 and, therefore, the assessee-bank was not entitled to claim deduction for the broken period interest payment.
11. Before we go into the question of law, we have to go to the facts. At this stage we may mention that the assessee-bank like all other banks, has been subscribing to Dated Government Securities and they have also been dealing in such securities. We are concerned with the latter aspect in this case. For the sake of clarity, we may mention that about 200 transactions were entered into during the assessment year 1977-78 and the figures involved run into lakhs and, therefore, for the sake of clarity, and for better understanding of the matter, we have focused our attention on one transaction out of 200. This procedure was also followed by the lower authorities.
12. On August 11, 1976, 4 3/4 per cent. Government of India Loan, 1980, f.v. Rs. 5 lakhs was purchased for Rs. 4,92,000. That security was sold on November 6, 1978. The half-yearly interest was payable on May 12 and November 12, each year. The bank became the holder of the security on August 11, 1976, and it received interest on November 12, 1976, of Rs. 11,875 from the Reserve Bank of India. The bank's year-ending was December 31, 1976. At the time of purchase, the assessee-bank also paid for the broken period interest of Rs. 5,871.63 to the transferor/seller. This amount was debited to interest receivable account (see page 117). On August 31, 1976, the interest receivable account was debited and the interest income account was credited by Rs. 1,319.44 (being the interest from August 11, 1976, up to August 31, 1976). Similarly, on September 30, 1976, Rs. 1,979.17 was credited to interest income account. The same method is followed for crediting interest income account as on October 31, 1976, November 12, 1976, and December 31, 1976. Therefore, for 142 days, the interest which was credited to interest income account came to Rs. 9,236.12, which was offered for tax. Similarly, on the above methodology, the interest which was credited to interest income account for the calendar year 1977 and which is offered for tax is Rs. 23,750 (see page 118 of the paper book). Similarly, coming to the third year, i.e., 1978, the interest income account was credited by Rs. 20,122.52. Therefore, under the above method of accounting, at the close of every month, the assessee has credited interest income account by Rs. 1,979.17. This figure of Rs. 1,979.17 represents interest at 4 3/4 per cent. on Rs. 5 lakhs. To sum up, the income returned for the above security was Rs. 9,236.12 for 142 days in the year 1976 ; Rs. 23,750 for the calendar year 1977 and Rs. 20,121.52 for 309 days between January 1, 1978, to November 6, 1978. This calculation was made on the basis of the principle that when one is accounting for trading in securities, interest income on such securities should be recorded as income for the period during which the bank was the holder of the securities. As against this method of calculation, the Department submitted that for 142 days of 1976, the assessee should have returned income of Rs. 11,875 and not Rs. 9,236 as the assessee had received half-yearly interest of Rs. 11,875 on November 12, 1976, from the Reserve Bank of India. For the calendar year 1977, the income returned under the bank's method of accounting was Rs. 23,750. This is accepted by the Department. For the third year 1978, the assessee has returned income under the above calculations of Rs. 20,122, whereas according to the principle applied by the Department, it should have been Rs. 11,875. However, surprisingly, the Assessing Officer has accepted the figure of Rs. 20,122 without giving any reason, the only reason being that under the above calculation, the assessee-bank has declared the higher figure of Rs. 20,122. The point which the court needs to clarify at this stage is that if one takes an overall view of the matter, there is no loss of revenue suffered by the Department (see annexure I to the judgment). The record shows that even counsel for the Department has not been able to point out loss of revenue under the method followed by the bank. One reason for the difference in the two methods adopted by the parties is because broken period interest received is treated as trading receipt, whereas broken period interest payment is disallowed as revenue expenditure. The above method is followed by the assessee in so far as interest on securities traded is concerned. Under the above method, the assessee has also accounted for Rs. 5,871.53, which the assessee paid for the broken period interest and they have also accounted for Rs. 11,479.17, which is taxed, being the amount which the assessee received for the broken period interest on November 6, 1978, when the above security was sold by the assessee. The Department has taxed broken period interest received of Rs. 11,479.17 as business income. But, they have denied deduction for Rs. 5,871.53 for payment made for the broken period interest at the time of purchase of the security. This point is very important. It distinguishes the facts of this case from that of Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) . In the present case, as held by the Tribunal, the Department has proceeded to compute the entire income under Section 28. In this case, the Department has sought to tax the broken period interest received under the head 'Business' and not under the head 'Interest on securities', whereas in the case of Vijaya Bank Ltd. : [1991]187ITR541(SC) , the facts show that the Department sought to assess the interest income under Section 18, i.e., under the head 'Interest on securities'. Once the Department seeks to assess broken period interest under the head 'Business', then the Department could not have rejected the impugned adjustment in the method of accounting adopted by the bank unless the Department was in a position to prove that the method adopted by the bank did not disclose the true and proper income. Now, when the assessee bought 4 3/4 per cent. Government of India Loan, 1980, the purchase price was Rs. 4,92,000 and the interest on purchase was Rs. 5,871.53, which was debited to interest receivable account. However, the security was purchased for Rs. 4,92,000, which was debited to asset account. The face value of the security receivable on redemption was Rs. 5 lakhs. The date of purchase was August 11, 1976. The date of redemption was May 12, 1980, and the date of sale was November 6, 1978. As stated above, the difference was Rs. 8,000 between the face value and the amount paid for the security. This difference of Rs. 8,000 has been accounted for by the bank on a monthly basis, which is as follows :
Rs.20 daysfor August, 1976(see pages 114 and 115)118.43 For the period September, 1976 to April, 1980, atRs. 177.65 is credited as profit on revaluation account7,816.60 For May, 1980(for 12days to redemption) is accounted for64.97
13. If one totals up Rs. 118.43, Rs. 7,816.60 and Rs. 64.97, then the resultant figure is Rs. 8,000. Accordingly, the difference of Rs. 8,000 is accounted for in the profit on revaluation account. The amount, by which the value of the security has been increased, has been offered for tax on accrual basis in the appropriate assessment years during which the assessee held the security, i.e., for the year ending December 31,1976, Rs. 829.03; for the year ending December 31, 1977, Rs. 2,131.80 ; and for the year ending December 31, 1978, Rs. 1,806.
14. Now, according to the Department, profit on sale of security comes to Rs. 9,857.64 during the assessment year 1977-78. This is calculated on the basis that the broken period interest payment was towards the capital cost of the investment. On that basis, according to the Department, profit on sale of security, which ought to be taxed, was Rs. 9,857.64 (see page 119 of the paper book).
15. There is no difference in the amount in tax, whether one adopts the asses-see's method or the Department's method as the following would show. Under the assessee's method of accounting, what is offered to tax is as follows :
Rs. Revaluation of security for the year ending 31-12-1976829.03 Revaluation of security for the year ending 31-12-19772,131.80 Revaluation of security for the year ending 31-12-19781,806.11 Loss on sale of security (page 115)(516.94) Interest for the broken period received at the timeof sale (page 118)11,479.17 Interest for the broken period paid at the time ofpurchase (page 117)(5,871.53)
9,857.64
16. Therefore, under either method, the same amount is offered for tax, The Department has not been able to show in this case as to why the method adopted by the assessee-bank ought to be rejected. On the other hand, the Department has not been able to explain as to why broken period interest received should be taxed whereas broken period interest payment should be disallowed. In the circumstances, we uphold the order of the Tribunal.
(B) Whether broken period interest payment by the assessee was allowable as revenue expenditure under the head 'Business'.
17. The assessee-bank, like several other banks, was consistently following the practice of valuing the securities/interest held by it at the end of each year and offerings for taxation, the appreciation in their value by way of profit/interest earned due to efflux of time. The bank also claimed deduction for the broken period interest payments. However, the Department did not accept the assessee's method in the assessment year in question in view of the judgment of the Karnataka High Court in the case of CIT (Addl.) v. Vijaya Bank [1976] TLR 524. This judgment has been subsequently upheld by the Supreme Court in Vijaya Bank Ltd. v. CIT (Addl.) : [1991]187ITR541(SC) . In view of the judgment of the Karnataka High Court, the Department took the view that the broken period interest payment cannot be allowed as a deduction because it came within the ambit of interest on securities under Section 18 of the Income-tax Act. It is the contention of the Department that the assessee-bank received interest on Dated Government Securities from the Reserve Bank of India on half-yearly basis. That, the assessee-bank also traded in such securities. That the assessee-bank bought Dated Government Securities during the intervening period between two due dates. That on purchase of the Dated Government Security, the assessee became the holder of the security and, accordingly, the assessee received half-yearly interest on the due dates from the Reserve Bank of India on purchase. Therefore, according to the Department, the income which the assessee-bank received came under Section 18 of the Income-tax Act--interest on securities. Under the circumstances, it was not open to the assessee-bank to claim deduction for the broken period interest payment made to the selling/transferor-bank. That, it was not open to the assessee to claim deduction as revenue expenditure for the broken period interest payment as no such deduction was permissible under Sections 19 and 20 of the Income-tax Act. That, it was not a sum expended by the assessee for realising interest under Section 19 and, therefore, the assessee was not entitled to claim deduction for the broken period interest payment as a revenue expenditure under Section 28 of the Income-tax Act. In this connection, the Department followed the judgment of the Karnataka High Court in Vijaya Bank's case [1976] TLR 524. Therefore, the point which we are required to consider in this case is : Whether the judgment of the Karnataka High Court in Vijaya Bank's case [1976] TLR 524 was applicable to the facts of the present case.
18. Before going further we may mention at the very outset that the security in this case was of the face value of Rs. 5 lakhs. It was bought for a lesser amount of Rs. 4,92,000. The difference was of Rs. 8,000. The assessee has revalued the security: The assessee offered the notional profit for taxation, as explained hereinabove, on accrual basis in the appropriate assessment year during which the assessee held the security. This difference could have been treated by the Department as interest on securities under Section 18. However, in the instant case, the Department has assessed the said difference under Section 28 under the head 'Business' and not under the head 'Interest on securities'. Having treated the difference under the head 'Business', the Assessing Officer disallowed the broken period interest payment, which gave rise to the dispute. It was open to the Department to assess the above difference under the head 'Interest on securities' under Section 18. However, they chose to assess the interest under the head 'Business' and, while doing so, the Department taxed broken period interest received, but disallowed broken period interest payment. It is in this light that one has to read the judgment of the Karnataka High Court and the Supreme Court in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) . In that case, the facts were as follows. During the assessment year under consideration, Vijaya Bank entered into an agreement with Jayalakshmi Bank Limited, whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. They also took over assets belonging to Jayalakshmi Bank. These assets consisted of two items, viz., Rs. 58,568 and Rs. 11,630.00. The said amount of Rs. 58,568 represented interest, which accrued on securities! taken over by Vijaya Bank from Jayalakshmi Bank and Rs. 11,630 was the interest which accrued up to the date of purchase of securities by the assessee-bank from the open market. These two amounts were brought to tax by the Assessing Officer under Section 18 of the Income-tax Act. The assessee-bank claimed that these amounts were deductible under Sections 19 and 20. This was on the footing that the Department had brought to tax, the aforestated two amounts as interest on securities under Section 18. It is in the light of these facts that one has to read the judgment in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) . In the light of the above facts, it was held that the outlay on purchase of income-bearing asset was in the nature of capital outlay and no part of the capital outlay can be set off as expenditure against income accruing from the asset in question. In our case, the amount which the assessee received has been brought to tax under the head 'Business' under Section 28. The amount is not brought to tax under Section 18 of the Income-tax Act. After bringing the amount to tax under the head 'Business', the Department taxed the broken period interest received on sale, but at the same time, disallowed broken period interest payment at the time of purchase and this led to the dispute. Having assessed the amount received by the assessee under Section 28, the only limited dispute was--whether the impugned adjustments in the method of accounting adopted by the assessee-bank should be discarded. Therefore, the judgment in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) has no application to the facts of the present case. If the Department had brought to tax, the amounts received by the assessee-bank under Section 18, then Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) was applicable. But, in the present case, the Department brought to tax such amounts under Section 28 right from the inception. Therefore, the Tribunal was right in coming to the conclusion that the judgment in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) did not apply to the facts of the present case. However, before us, it was argued on behalf of the Revenue, that in view of the judgment in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) , even if the securities were treated as part of the trading assets, the income therefrom had to be assessed under Section 18 of the Act and not under Section 28 of the Act as income from securities can only come within Section 18 and not under Section 28. We do not find any merit in this argument. Firstly, as stated above, Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) has no application to the facts of this case. Secondly, in the present case, the Tribunal has found that the securities were held as trading assets. Thirdly, it has been held by the Supreme Court in the subsequent decision reported in the case of CIT v. Cocanada Radhaswami Bank Ltd. : [1965]57ITR306(SC) , that income from securities can also come under Section 28 as income from business. This judgment is very important. It analyses the judgment of the Supreme Court in United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , which has been followed by the Supreme Court in Vijaya Bank Ltd.'s case : [1991]187ITR541(SC) . It is true that once an income falls under Section 18, it cannot come under Section 28. However, as laid down by the Supreme Court in Cocanada Radhaswami Bank Ltd.'s case : [1965]57ITR306(SC) , income from securities treated as trading assets can come under Section 28. In the present case, the Department has treated income from securities under Section 28. Lastly, the facts in the case of United Commercial Bank Ltd. : [1957]32ITR688(SC) , also support our view in the present case. In United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , the assessee-bank claimed a set-off under Section 24(2) of the Indian Income-tax Act, 1922 (section 71(1) of the present Act), against its income from interest on securities under Section 8 of the 1922 Act (similar to Section 18 of the present Act). It was held that United Commercial Bank was not entitled to such a set-off as the income from interest on securities came under Section 8 of the 1922 Act. Therefore, even in United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , the Department had assessed income from interest on securities right from the inception under Section 8 of the 1922 Act and, therefore, the set-off was not allowed under Section 24(2) of the Act. Therefore, United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , has also no application to the facts of the present case in which the assessee's income from interest on securities is assessed under Section 28 right from inception. In fact, in United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , the matter was remitted back as it was contended on behalf of United Commercial Bank that the securities in question were a part of the trading assets held by the assessee in the course of its business and the income by way of interest on such securities was assessable under Section 10 of the Indian Income-tax Act, 1922 (similar to Section 28 of the present Act). It is for this reason that in the subsequent judgment of the Supreme Court in the case of Cocanada Radhaswami Bank Ltd. : [1965]57ITR306(SC) , the Supreme Court has observed, after reading United Commercial Bank Ltd.'s case : [1957]32ITR688(SC) , that where securities were part of trading assets, income by way of interest on such securities could come under Section 10 of the Indian Income-tax Act, 1922.
19. In the light of what we have discussed hereinabove, we find that the assessee's method of accounting does not result in loss of tax/revenue for the Department. That, there was no need to interfere with the method of accounting adopted by the assessee-bank. That, the judgment in the case of Vijaya Bank Ltd. : [1991]187ITR541(SC) , had no application to the facts of the case. That, having assessed the income under Section 28, the Department ought to have taxed interest for the broken period interest received and the Department ought to have allowed deduction for the broken period interest paid.
Conclusion :
We now propose to answer the questions referred to us under Section 256(1) of the Income-tax Act, 1961.
Questions in Income-tax Reference No. 346 of 1987 :
(1) Whether,on the facts and in the circumstances of the case, the Tribunal was rightin law in holding that the purchase price of securities shouldbe bifurcated into (i) interest accrued up to the date of purchase, and(ii) balance of the price and that such interest shouldbe allowed as revenue expenditure, in the year of purchase, if it is thepractice of banks to charge such interest to revenue account On the facts of this case, there was no reason forthe Department to discard the impugned adjustment done by the bank incomputing its business income. Therefore, on the facts, our answer is inthe affirmative, i.e, in favour of the assessee and against theDepartment. (2)Whether, on the facts and in the circumstances of the case, the Tribunalwas right in law in holding that the past assessments having been made onthe footing that the interests accruing on securities up to the date ofpurchase having been allowed as revenue expenditure, this shouldbe continued notwithstanding that the Karnataka HighCourt in the case of Vijaya Bank ltd. [1976] TLR 524, has held that such part of the price is not revenueexpenditure and in spite of it not having been established to be thedepartmental practice to allow such expenditure in case of all banks ?-do.- (3)Without prejudice to theabove, whether, on the facts and in the circumstances of the case, theTribunal was right in law in holding that the Commissioner of Income-tax (Appeals) was justified indirecting that the sum of Rs. 4,07,283 being interest received on the broken period of thesecurities sold by the assessee shouldnot be considered as part of the chargeable income for the year of account? Does not arise in view of our answers to questionsNos. (1)and (2) hereinabove. (4)Whether, on the facts and in the circumstances of the case, the assesseeis not liable to be taxed in respect of the amount credited to theinterest suspense account representing interest on sticky loans andadvances and which is not taken to the profit and loss account for therelevant accounting year? In view of the judgment of the Supreme Court in the case of UntiedCommercial Bank v. CIT : [1999]237ITR889(SC) , question No.4 is answered in favour of the assessee and against thedepartment Therefore, the assessee is not liable to be taxed for amountscredited to Interest Suspense Account on account of interest on stickyloans and advances and which is not taken to profit and loss account. (5)Whether, on the facts and in the circumstances of the case, the Tribunalwas right in law in holding that the restriction of deduction of expensesat 5 per cent., laid down in section 44C of the Act, was not applicable in respect of expenditure incurred up to June 1, 1976 In view of the judgment of this court in the case of MercantileBank ltd, v.CIT : [2001]252ITR225(Bom) , thequestion is answered in favour of the assessee and against the Department,i.e., section 44C cameinto force from June 1, 1976, and, therefore, restriction of deduction ofexpenses at 5per cent. was not applicable to expenditure incurred up to June Z, 1976. (6)Whether, on the facts and in the circumstances of the case, the Tribunalwas right in law in holding that the provisions of section 40A(5) ofthe Income-tax Act are not applicable for disallowance of theexpenses incurred by the assessee in respect of the club membership subscription fees paid in respect of the employees of theassessee-company In view of the judgment of this court in the case of OilsElevator Co. (India) Ltd. v. CIT : [1992]195ITR682(Bom) ,question No.6 is answered in the affirmative, i.e., in favour of the assessee and against the Depart-ment, i.e., section 40A(5) is not applicable for disallowance of expenses incurredby the assessee in respect of club membership subscription fees, which is held to be business expenditureand not a perquisite. Questions in Income-taxReference No.75 of 1986 : (1)Whether, on the facts and in the circumstances of the case, the Tribunalwas right in holding that for the purposes of computing the disallowanceunder section 40A(5) of the Income-tax Act, 1961,rule 3of the Income-tax Rules, 1962, cannot beinvoked in the case of the applicant for determining the value ofrent-free accommodation and the conveyance provided to their employees In the affirmative, i.e., infavour of the Department and against the assessee in view of the judgmentin C/T v. BritishBank of Middle East : [2001]251ITR217(SC) . (2)Whether, on the facts and in the circumstances of the case, the Tribunalwas right in disallowing a sum of Rs. 8,77,264,Rs. 3,57,842 being the net interest paid by the applicant for thebroken period on purchase/sale of securities In the negative, i.e., infavour of the assessee and against the Department. Questions in Income-taxReference No.173of 1983 : (1) Whether,on the facts and in the circumstances of the case, the Tribunal was rightin holding that for the purpose of computing the disallowance undersection 40A(5) ofthe Income-tax Act, 1961,rule 3 of the Income-tax Rules, 1962, cannot be invoked in the case of the applicant for determining thevalue of rent-free accommodation In the affirmative, i.e., infavour of the Department andagainst the assessee in view of the judgment in CITv. BritishBank of Middle East : [2001]251ITR217(SC) . (2)Whether, on the facts and in the circumstances of the case, the assesseewas entitled to deduct the sum of Rs. 6,07,302being the net interest paid by the assessee for the broken period to thepersons from whom it brought the securities while computing its businessincome In the affirmative, i.e., infavour of the assessee and against the Department.
Accordingly, all the above references are accordingly disposed of. No order as to costs.
annexure IStatementshowing interest received and interest offered for tax
Rs. Interest receivedon 12-11-1976 (see page 117)11,875.00 Interest receivedon 12-5-1977 (see page 117)11,875.00 Interest receivedon 12-11-1977 (see page 117)11,875.00 Interest receivedon 12-5-1978 (see page 118)11,875.00 Interest received(on sale) on 6-11-1978 (see page 118)11,479.17
Total interestreceived ..... (A)58,979.17 Less : Interestpaid (on purchase) on 11-8-1976 (see page 117) .... (B)(5,871.53)
Total interestreceived ... (A) - (B)53,107.64 Interest incomeaccount (amount transferred to profit and loss account for the year ending31-124976) (see page 118)9,236.12 Interest incomeaccount (amount transferred to profit and loss account for the year ending31-12-1977) (see page 118)23,750.00 Interest incomeaccount (amount transferred to profit and loss account for the year ending31-12-1978) (see page 118)20,121.52 Total of interestincome transferred to profit and loss account53,107.64 Total interestreceived53,107.64 Total interesttransferred to profit and loss account and offered for tax53,107.64